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CMA Part 2: Strategic Financial Management: free practice test

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Practice test questions with answers and explanations

Try the questions in the test above first, then open each one here to see the correct answer and why every other option is wrong.

01Hadeel Home Goods reports for the year (SAR 000): net sales 2,400; cost of sales 1,488; selling expenses 312; interest expense 60; total assets 3,000; dividends 90. Last year gross margin was 40%. An analyst also notes inventory rose 15%. Which statement about this year's common-size performance is correct?

Practice question Unit: Financial Statement Analysis

  1. ACost of sales is 62% of sales; gross margin fell 2 percentage points ✓ Correct answer

    Cost of sales/sales = 1,488/2,400 = 62%; gross margin is 38%. The fall from 40% to 38% is 2 percentage points, a 5% relative decline. Basis: IMA Glossary: Common Size Financial Statements.

  2. BCost of sales is 49.6% of sales; gross margin is 50.4%

    49.6% is 1,488/3,000, using total assets. A common-size income statement uses net sales, not assets, as its base.

  3. CGross margin is 38%; it fell 2% relative to last year's margin

    The 38% margin is correct, but the relative decrease is (40 − 38)/40 = 5%. Two percentage points is not a 2% decrease.

  4. DOperating margin is 22.5% after deducting selling and interest expenses

    Interest is a financing expense here. Operating margin is (2,400 − 1,488 − 312)/2,400 = 25%; 22.5% is the margin after interest.

Reference: IMA Glossary: Common Size Financial Statements — https://imamiddleeast.org/wp-content/uploads/2020/04/CMA-ENGAR-Glossary.pdf

02Maskan Fittings has a current ratio of 1.8, net working capital of SAR 240,000, a quick ratio of 1.1 and total assets of SAR 1.5 million. Its bank covenant requires a current ratio of at least 1.5. How much new short-term borrowing, all used to buy inventory, can it add before breaching the covenant?

Practice question Unit: Financial Statement Analysis

  1. ASAR 60,000

    This holds current assets fixed at 540,000 (540,000/1.5 − 300,000), but they rise with the inventory.

  2. BSAR 240,000

    Borrowing 240,000 gives 780,000/540,000 = 1.44, a breach.

  3. CSAR 160,000

    This divides working capital by the covenant ratio (240,000/1.5), which has no meaning here.

  4. DSAR 180,000 ✓ Correct answer

    Correct: CL = 240,000/0.8 = 300,000 and CA = 540,000; (540,000 + X)/(300,000 + X) = 1.5 gives X = 180,000. Basis: IMA Glossary: Current Ratio; Net Working Capital.

Reference: IMA Glossary: Current Ratio; Net Working Capital — https://imamiddleeast.org/wp-content/uploads/2020/04/CMA-ENGAR-Glossary.pdf

03A diversified fund adds a gold-mining share with a beta of −0.4 and a return standard deviation of 30%. The risk-free rate is 3% and the expected market return is 8%. What is the share's CAPM required return?

Practice question Unit: Corporate Finance

  1. A5.0%

    This ignores the negative sign of beta (3% + 0.4 × 5%).

  2. B3.0%

    This drops the beta term; a nonzero beta changes the required return.

  3. C1.0% ✓ Correct answer

    Correct: 3% + (−0.4) × (8% − 3%) = 1.0%; standard deviation is not used. Basis: Columbia University CAPM notes, Theorem 1.1; IMA LOS Part 2 B.1.

  4. D−0.2%

    This multiplies beta by the market return (8%) rather than the 5% premium.

Reference: Columbia University CAPM notes, Theorem 1.1; IMA LOS Part 2 B.1 — https://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdf

04A bond has a face value of SAR 1,000, an 8% annual coupon paid semiannually, and exactly one year remaining to maturity. Immediately after a coupon payment, its nominal annual yield is 10%, compounded semiannually. What is its price to the nearest SAR 0.01?

Practice question Unit: Corporate Finance

  1. A895.87

    SAR 895.87 results from discounting half-year cash flows at 10% per period: 40/1.10 + 1,040/1.10². The correct half-year yield is 5%.

  2. B1,000.00

    Par would be the price if coupon rate equaled market yield. The 8% coupon is below the 10% yield, so the bond sells at a discount.

  3. C981.41 ✓ Correct answer

    Each half-year coupon is 1,000 × 8%/2 = SAR 40; the half-year yield is 10%/2 = 5%. Price = 40/1.05 + 1,040/1.05² = SAR 981.41. Basis: IMA CMA LOS, Part 2 B.2: bond valuation using discounted future cash flows.

  4. D1,055.78

    SAR 1,055.78 uses the full annual coupon of SAR 80 each half-year: 80/1.05 + 1,080/1.05². This doubles coupon cash flows.

Reference: IMA CMA LOS, Part 2 B.2: bond valuation using discounted future cash flows — https://www.imaglobal.org/assets/static/cma-learning-outcome-statements-2024.HDHHOjUF.937f1af111.pdf

05Wahat Furniture has sales of SAR 600,000, total contribution margin of SAR 180,000, fixed costs of SAR 135,000 and operating income of SAR 45,000. Sales are expected to rise 10% with the same prices, cost behaviour and fixed costs. Using the degree of operating leverage, what will operating income be?

Practice question Unit: Business Decision Analysis

  1. ASAR 49,500

    This raises income by only 10%, ignoring operating leverage.

  2. BSAR 58,500

    This uses fixed costs/operating income (3) as DOL; DOL is 180,000/45,000 = 4.

  3. CSAR 63,000 ✓ Correct answer

    Correct: DOL = 4; income rises 4 × 10% = 40%, so 45,000 × 1.4 = 63,000. Basis: IMA CMA LOS, Part 2 A.2 and C.1: degree of operating leverage and CVP.

  4. DSAR 105,000

    This adds 10% of sales (60,000) to income as if there were no variable costs.

Reference: IMA CMA LOS, Part 2 A.2 and C.1: degree of operating leverage and CVP — https://www.imaglobal.org/assets/static/cma-learning-outcome-statements-2024.HDHHOjUF.937f1af111.pdf

06Qimma Foods can buy a component for SAR 18 or make it in-house. Making requires variable cost of SAR 12 per unit and a temporary supervisor costing SAR 2 per unit, who would not be hired if the company buys. The machine has idle capacity; its depreciation of SAR 3 per unit is allocated and continues either way. Which costs are relevant to the short-term make-or-buy choice?

Practice question Unit: Business Decision Analysis

  1. ASAR 12 variable cost, SAR 3 depreciation and the SAR 18 purchase price

    Depreciation continues either way, and the avoidable supervisor cost is left out.

  2. BSAR 12 variable cost and the SAR 18 purchase price

    Omits the SAR 2 supervisor cost that buying avoids.

  3. CSAR 12 variable, SAR 2 supervisor, SAR 3 depreciation and the SAR 18 price

    Adds the SAR 3 depreciation, which does not differ between the alternatives.

  4. DSAR 12 variable cost, SAR 2 supervisor and the SAR 18 purchase price ✓ Correct answer

    Relevant costs differ between alternatives: make 12 + 2 = 14 versus buy 18. Basis: IMA Glossary: Relevant Cost.

Reference: IMA Glossary: Relevant Cost — https://imamiddleeast.org/wp-content/uploads/2020/04/CMA-ENGAR-Glossary.pdf

07Hayat Glassware's unit costs at normal volume are: variable manufacturing cost 56; fixed manufacturing 16; selling and administration 8; full cost 80. It prices at full cost plus a 25% markup on cost. A competitor sells a similar item for SAR 95. What price does the policy give?

Practice question Unit: Business Decision Analysis

  1. ASAR 90

    This marks up manufacturing cost only (72 × 1.25).

  2. BSAR 106.67

    This treats 25% as a margin on price (80/0.75).

  3. CSAR 100 ✓ Correct answer

    Correct: 80 × 1.25 = 100; the competitor's price does not change the formula. Basis: IMA Glossary: Cost-Plus Pricing.

  4. DSAR 70

    This marks up variable cost only (56 × 1.25).

Reference: IMA Glossary: Cost-Plus Pricing — https://imamiddleeast.org/wp-content/uploads/2020/04/CMA-ENGAR-Glossary.pdf

08A press line at Saqr Metals has a 5% annual accident probability and an expected loss of SAR 2 million per accident. Preventive maintenance costing SAR 40,000 a year would cut the probability to 2%. An automatic shutdown costing SAR 25,000 a year would cut the loss per accident to SAR 1.2 million. Which risk-reduction choice gives the lowest total annual cost (expected loss plus control cost)? The controls can be used together, with both reductions applying; assume at most one accident per year and no other effects.

Practice question Unit: Enterprise Risk Management

  1. ABoth controls, at SAR 89,000

    Both controls reduce expected loss to 2% × 1,200,000 = 24,000, but annual control costs total 65,000. The combined total is SAR 89,000, above maintenance alone.

  2. BAutomatic shutdown only, at SAR 85,000

    60,000 + 25,000 = 85,000, which is higher than maintenance alone.

  3. CNo action, at SAR 100,000

    Each control option costs less than 100,000 in total.

  4. DPreventive maintenance only, at SAR 80,000 ✓ Correct answer

    Correct: 2% × 2,000,000 + 40,000 = 80,000, the lowest of 100,000, 80,000, 85,000 and 89,000. Basis: IMA CMA LOS, Part 2 D.1: expected loss and cost-benefit evaluation of risk responses.

Reference: IMA CMA LOS, Part 2 D.1: expected loss and cost-benefit evaluation of risk responses — https://www.imaglobal.org/assets/static/cma-learning-outcome-statements-2024.HDHHOjUF.937f1af111.pdf

09A division of Murjan Foods will adopt a packaging line. The line's own cash flows look positive, but it will free a leased building (saving SAR 200,000 rent) and will take operators from another product that currently earns SAR 80,000 contribution. Allocated HQ IT of SAR 50,000 will be charged either way. What is the basis for the project's relevant cash flows?

Practice question Unit: Capital Investment Decisions

  1. AAll cash flows the project generates, including allocated HQ IT

    The unchanged SAR 50,000 HQ IT allocation is not incremental and must be excluded. Including an allocated cost merely because it appears in project accounts distorts the decision.

  2. BProject accounting profit over its life

    Accounting profit is not incremental cash flow: it may include noncash charges and unchanged allocations and omit contribution forgone from diverted operators.

  3. CTotal cash flows of the whole division after adoption

    Total division cash flows include activities unchanged by the investment. Compare the whole firm's cash flows with and without the project to isolate its effect.

  4. DThe difference in firm cash flows with versus without the project ✓ Correct answer

    Use incremental firm-wide cash flows. Relative to the line's own flows, add SAR 200,000 rent saved, subtract SAR 80,000 contribution forgone, and exclude unchanged HQ IT: a net adjustment of +SAR 120,000. Basis: IMA CMA LOS, Part 2 E.1: incremental cash flows and opportunity costs.

Reference: IMA CMA LOS, Part 2 E.1: incremental cash flows and opportunity costs — https://www.imaglobal.org/assets/static/cma-learning-outcome-statements-2024.HDHHOjUF.937f1af111.pdf

10An analyst at Sudair Mining validated a project's base-case NPV of SAR 4 million, but three of five validated downside scenarios give negative NPVs, the worst being −SAR 6 million. The sponsor asks her to show the investment committee only the base case, saying the scenarios are 'just what-ifs'. What best meets the IMA Credibility standard?

Practice question Unit: Professional Ethics

  1. AReport the base case and describe the downside only as a general risk

    A generic warning conceals the size and frequency of validated negative scenarios that could materially influence the committee's decision.

  2. BPresent the base case and validated downside scenarios with their assumptions ✓ Correct answer

    IMA Credibility requires fair, objective communication of relevant information. Present the base case and downsides with assumptions, without inventing probabilities or portraying all scenarios as equally likely. Basis: IMA Statement of Ethical Professional Practice (2024), IV. Credibility 1–2.

  3. CReport the worst downside as the expected NPV to avoid understating risk

    The worst case is a scenario, not an expected value. Calling it expected without probability support is as misleading as suppressing it.

  4. DDefer scenario disclosure until the sponsor selects a preferred investment

    The committee needs material downside information before selecting an investment. Sponsor preference does not justify withholding relevant validated analysis.

Reference: IMA Statement of Ethical Professional Practice (2024), IV. Credibility 1–2 — https://prodcm.imanet.org/-/media/IMA/Files/Home/Career-Resources/Ethics-Center/Statement/IMA_Ethics-Card_Color_2024.ashx

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